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Monday, 23 July, 2001, 14:46 GMT 15:46 UK
Indonesia economic crisis point
Riot police protect themselves against the rain
Indonesia faces a barrage of economic problems

by BBC News Online's Emma Clark

When it rains in Indonesia, it pours in true tropical fashion. Over the past 18 months, a maelstrom of political and financial problems has hammered the economy and sent international investors running for shelter.

The latest is the impeachment of President Abdurrahman Wahid.

Already, Indonesia is struggling to re-build a collapsed banking sector, while paying interest on billions of debt that almost exceeds its annual gross domestic product.

The country's problems began to look dire a couple of months ago when the International Monetary Fund decided to withhold a $400m loan.

President Abdurrahman Wahid
Mr Wahid has been impeached
In May, IMF officials walked out on negotiations over the loan, denying Indonesia a much needed seal of approval from the international community.

Now, the IMF has relented, promising more money as early as August, but Indonesia's problems continue.

Vasuki Shastry, a spokesman at the IMF, said the next tranche of financial support is contingent upon the Indonesian parliament's revision of its budget.

However, with the new President Megawati Sukarnoputri at the helm, the country's economic destiny still remains unclear.

Foreign fright

The political uncertainty is the nail in the coffin for international investors who were brave enough to return to the country after the Asian crisis of 1997-98.

About $9bn in foreign capital left the country in 2000, according to the World Bank, and the figure is expected to be higher this year.

Protesters in support of President Wahid
Political instability has made foreign investors nervous
As a result of the exodus, the Indonesian rupiah has spiralled to over 11,000 against the US dollar over the past few months, reaching levels last seen during the depreciation of the currency in 1997.

To defend the country against inflation, the central bank has pushed up interest rates six times in as many months.

However, this has only increased the amount of interest the government has had to pay on its debt of $72bn, thereby leaving it with a ballooning deficit.

It's a bleak prospect for a country that was once considered an Asian tiger, with an economy that roared at 7% during much of the last decade.

In 2000 growth slowed to 4.8% and this year could be as low as 2.8%, according to the Economist Intelligence Unit.

Indonesia problems started during the Asian crisis, when a build-up of private debt subsequently sparked a collapse of the banks that had over-lent.

The country owes $145bn in total public and private debt.

"It's hard to find a company in Indonesia now that is solvent," said Caroline Bain, a senior editor at the EIU.

Money problems

In addition, Indonesia's government is unable to borrow more money from international investors unless it pays impossibly high interest rates, added Ms Bain.

The IMF has withheld financial support since December because it felt the country had not made enough progress on restructuring its economy.

Dr Jonathan Pincus, a lecturer in economics at the School of African and Oriental Studies in London believes the IMF is taking a hard line to obfuscate its role in the past.

During the Asian crisis, about $80bn that was supposed to help keep ailing banks afloat disappeared from under the nose of the IMF, leading to a collapse of the banking system.

The IMF's Mr Shastry declined to comment on the loss of $80bn, but he emphasised that "strengthening governance is an important element of the Fund-supported programme for Indonesia".

He added that an audit of the central bank, ordered by the IMF, did reveal "major irregularities".

Others speculate that the IMF is waiting for a new administration in Indonesia before it steps in with more loans.

However, the IMF has said its programme remains unaffected by the impending change in government.

A cure for economic ills?

As a remedy for Indonesia's problems, the IMF is calling for greater independence of the central bank, a speedy privatisation of the best banking assets and a ban on borrowing by regional state authorities.

But the IMF's biggest concern is the size of Indonesia's budget deficit, which could equal up to 6% of the country's GDP this year. The IMF wants Indonesia to revise its budget so that the deficit falls to 3.7% of GDP.

A statement released by Anoop Singh, a deputy director in the IMF's Asia and Pacific department, a couple of months ago, said:

"The IMF mission and the Indonesian authorities view with serious concern the significant deterioration in the fiscal situation".

The two sides, however, have in the past seemed at odds over how to resolve the situation.

Conflicts of interest

Originally, the government had planned to raise money on the domestic market with a complex bond issue.

The government hoped to persuade domestic investors to part with $500m to $1bn. It was going to guarantee the bond with money paid by the Singapore government for a new gas project.

But this idea was eventually dropped following the IMF's disapproval of such funding.

The IMF advised the government to "exclude such financing" and said it would prefer to see the government cutting down on public spending, such as fuel subsidies.

Not so long ago, rises in the cost of fuel sparked mass demonstrations which eventually led to the resignation of President Suharto in 1999, pointed out SOAS' Dr Pincus.

Understandably, the government was reluctant to alienate the middle classes, which are most affected by the cost of fuel, but decided in the end to increase prices by 30%.

Wahid's legacy

Many blame Mr Wahid for Indonesia's tardiness in carrying out economic reform.

His almost non-existent power base in the parliament over recent months left him impotent to push through economic reform, even if he had been inclined.

Even if this nation had 100 presidential changes, nobody could mend the economy

President Wahid
"People block his policies - whether they are right or wrong - just because they don't like him," said one observer recently, prior to his impeachment.

Mr Wahid has given a spirited defence of his failures. "Even if this nation had 100 presidential changes, nobody could mend the economy," he said a few months ago.

There have also been conflicts between the central bank and the government, which has been reluctant to hand over greater autonomy to an institution that oversaw the disappearance of $80bn during the Asian crisis.

Banking reform

Similarly, Indonesia's efforts to sell off bank assets to recoup money spent on bailing out the banking sector have been troublesome.

The Indonesian Bank Restructuring Agency (IBRA), which was charged with selling off the assets, ranging from shrimp farms to luxury Bali hotels, has not been a huge success.

The parliament has interceded several times to prevent the agency from selling assets to foreign investors, thereby exacerbating the crisis of confidence.

Then in June, I Putu Gde Ary Suta became IBRA's fourth head in only one-and-half years.

And if that wasn't enough, the global slowdown will hit Indonesia hard. About 14% of the country's exports - mainly oil - go to the US, while 21% goes to Japan, another economic victim.

Limited options

As far as Dr Pincus is concerned, the litany of problems leaves Indonesia with limited options.

He believes it is near impossible for the country to both manage a democratic transition and re-build the banking sector.

Either they will have to give up on the democratic experiment and use military intervention to launch a radical restructuring, or Indonesia will default on its public debt

Dr Pincus
"Either they will have to give up on the democratic experiment and use military intervention to launch a radical restructuring, or Indonesia will default on its public debt," he said.

As drastic as a default sounds, he argues that this would be Indonesia's big chance to wipe the slate clean.

The IMF also recognises the need for strong government to push through reform.

IMF managing director Horst Kohler recently said of Indonesia: "If there is not an order which can have control of financing, then every money which is spent is lost money.

"So we need to know what is the basic order in this country in order to implement our strong commitment to work with Indonesia, that it can find a way out of the crisis."

Even with the former Vice-President Ms Sukarnoputri now in charge, Indonesia faces an uncertain future and no shortage of hard decisions.

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